Person interested in outcome of the Dispute cannot appoint the Sole Arbitrator, Supreme Court

Person interested in outcome of the Dispute cannot appoint the Sole Arbitrator, Supreme Court

Bar & Bench

Tariq Khan

The Bench of Justices Uday Umesh Lalit and Indu Malhotra of the Supreme Court of India finally settled the issue regarding the unilateral appointment of Arbitrators. In Perkins Eastman Architects DPC & Anr. versus HSCC (India) Ltd., Arbitration Application No. 32 of 2019, the Supreme Court while dealing with an application under Section 11(6) read with Section 11(12)(a) of the Arbitration Act has held that a person who has an interest in the outcome or decision of the disputes must not have the power to appoint a sole arbitrator.

Brief Facts

The contract entered into between the parties contained Clause 24 regarding dispute resolution which empowered the Chairman and Managing Director of the respondent company to appoint a sole arbitrator. Accordingly, the Chairman and Managing Director was called upon to appoint a sole arbitrator in terms of said Clause 24. However, no appointment of an arbitrator was made within thirty days but a letter was addressed by Chief General Manager of the respondent appointing the sole arbitrator.

Arguments Raised by the Applicant

Relying on the decisions of the Supreme Court in Walter Bau AG, Legal Successor of the Original Contractor, Dyckerhoff and Widmann, A.G. v. Municipal Corporation of Greater Mumbai and  (2015) 3 SCC 800 and TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377, the Applicant contended that that the appointment process contemplated in Clause 24 gave complete discretion to the Chairman and Managing Director of the respondent to make an appointment of an arbitrator of his choice, the Chairman and Managing Director of the respondent would naturally be interested in the outcome or decision in respect of the dispute. It was contended that the prerequisite of element of impartiality would, therefore, be conspicuously absent in such process.

Issues Raised

Two issues were raised before the Court. (i) Whether the arbitration would be an International Commercial Arbitration or not. (ii) Whether a person not eligible to act as an Arbitrator can appoint anyone else as an Arbitrator?

Findings of the Court 

Relying on Larsen and Toubro Limited SCOMI Engineering BHD Arbitration Petition (C) No. 28 of 2017, the Court answered the first issue in the affirmative and held that since the lead member of the Consortium company i.e. Applicant No.1 is an Architectural Firm having its registered office in New York, requirements of Section 2(1)(f) of the Arbitration Act are satisfied and the arbitration in the present case would be an “International Commercial Arbitration” 

While dealing with the second issue the court noted the decision in TRF Limited v Energo Engineering Projects Limited and observed as under:

…Paragraph 50 of the decision shows that this Court was concerned with the issue, “whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator” The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation.

The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited.

It was further observed that if there are justifiable doubts as to the independence and impartiality of the person nominated, and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, such appointment can be made by the Court. 

The Court also considered the issue that arose further i.e. whether the power can be exercised by the Court under Section 11 of the Arbitration Act when the appointment of an arbitrator has already been made. The Court relied on Walter Bau AG and held that unless the appointment of the arbitrator is ex facie valid and such appointment satisfies the Court exercising jurisdiction under Section 11(6) of the Arbitration Act, acceptance of such appointment as a fait accompli to debar the jurisdiction under Section 11(6) cannot be countenanced in law.

Lastly, it was observed that imperatives of creating healthy arbitration environment demand that the instant application deserves acceptance. With these observations, the court annulled the effect of the letter issued by the respondent for appointment of the arbitrator.

Advocate Amar Dave acted on behalf of the Applicants, briefed by team of advocates from Wadia Ghandy & Co. (Delhi) while the Respondent was represented by Senior Advocate Gurukrishna Kumar, briefed by Advocate Saurabh Mishra.

[Read the Judgment]

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